[Takryucheongron] Same Taxation... Desirable from the Perspective of Equity

Hong Woo-hyung, Professor of Economics at Hansung University

Recently, public interest in the stock market has been unprecedentedly intense. The low-interest-rate policy due to the novel coronavirus disease (COVID-19) has provided enormous liquidity to the market, and the current stock market is rapidly recovering with abundant financial support. Amid this, the government recently proposed a financial tax reform plan that imposes capital gains tax on financial investment income. However, this tax reform plan is facing fierce opposition from the Donghak Ants, who have started to realize gains little by little, resulting in repeated difficulties. The question here is: how well do we truly understand the new tax system, and are we opposing it after sound discussions?

First of all, the current discussion does not focus on whether the financial tax reform plan improves the existing tax system. Embarrassingly, Korea's current financial tax system is so complex that even experts cannot fully understand it, as it has been patched up every time a new financial product emerged. In particular, almost everything related to stock products has been resolved through securities transaction tax. Against this background, the introduction of a financial investment income tax has been discussed for a long time.

Of course, there are many parts that need improvement, but in my view, the basic direction of the financial tax reform plan is desirable from the perspective of tax equity. For example, compare a wage earner who invests in stocks for financial management with a person who makes a living through stock investment. Under the current system, the former must pay at least 6% wage income tax and 0.25% securities transaction tax, while the latter only pays 0.25% securities transaction tax. Is this taxation method, where only wage earners and self-employed pay income tax, really reasonable? The basic policy of the new reform plan is to tax wage income and financial investment income equally. And is the new financial tax reform really a system that only harms small-scale investors? As a small-scale investor myself, the first things I noticed were the annual 20 million won deduction, loss offset and carryforward, and the reduction of securities transaction tax.

In other words, if my investment income is less than 20 million won per year, I only have to pay 0.15%, which is lower than the current 0.25%, as securities transaction tax. Also, if there is an investment loss, no income tax is paid, and the loss amount is carried forward for three years. Excluding the special circumstances of COVID-19, it would not be easy for small investors to realize gains exceeding 20 million won annually. Then, the majority of small investors will benefit from the new financial tax. Of course, the issue of having to pay securities transaction tax still exists. Although it requires in-depth discussion, I believe that from the perspective of tax equity, it is more desirable to gradually reduce or consider abolishing the securities transaction tax when introducing capital gains tax.

Of course, there are various problems with the current reform plan. First, while 20 million won is deducted for stock investment, income from collective investment schemes (funds) is fully taxed, and only 2.5 million won is deducted for income from overseas stocks, unlisted stocks, bonds, and derivatives, which violates tax equity. This is likely to cause market distortion contrary to the government's intention. Also, issues such as opportunity costs due to monthly withholding tax and the lack of long-term investment promotion policies remain to be addressed. So, what should we do now? Should we oppose the introduction of capital gains tax on financial investment income, which most people do not pay? Or should we carefully weigh the pros and cons of the new financial tax system and engage in fierce debates on supplementary measures? This is a time that requires cool-headed reason and passionate heart.

Hong Woo-hyung, Professor of Economics, Hansung University

This content was produced with the assistance of AI translation services.